The upheaval of recent months has obscured the record investment in the resources sector and the big growth in production coming in future years.
The upheaval of recent months has obscured the record investment in the resources sector and the big growth in production coming in future years.
WHEN Rio Tinto’s Pilbara operations president Greg Lilleyman spoke at a Committee for Economic Development of Australia conference in October, he remarked on the new topic of daily discussion on St Georges Terrace.
He said the iron ore price had emerged from relative obscurity to join the exchange rate, the All Ords and the gold price as something to watch on a daily basis.
The reason can be found in the accompanying graph, which shows the dramatic plunge in the iron ore price to below $US90 per tonne in October, before its prompt recovery to around $US120/t currently.
The iron ore price, and the accompanying project news, tells the story of business in Western Australia in 2012 better than any other indicator.
It shows how the state has been on a rollercoaster ride, with talk that the resources boom was over, only for the outlook to pick up as 2012 drew to a close.
Early in the year, the mood was very positive, even though the iron ore price had already come off its 2011 peak.
In February, BHP agreed to spend nearly $1 billion planning for its outer harbour project at Port Hedland, and Rio committed to spend a further $4 billion expanding its Pilbara iron ore operations.
Two months later, Hancock Prospecting wrapped up a $3.2 billion investment from three major Asian investors in its Roy Hill project.
And in May, chemicals company Orica and its joint venture partners agreed to proceed with construction of an $US800 million ammonium nitrate plant in the Pilbara to service the iron ore miners.
The good news started to dry up after that; and that was a worry for the WA business community, which had become increasingly reliant on big resources projects to drive activity.
Instead, the focus turned to the slowdown in China and the impact that would have on commodity prices and the viability of new projects.
It was a similar story in the oil and gas sector, which had grown to rival iron ore as the key driver of business activity in WA.
There was a dearth of new project announcements; instead the news was all about project delays, cost increases and ownership changes.
Peak reached
It was the world’s largest mining company, BHP Billiton, that confirmed the surge in new projects and capacity expansions had peaked.
Ironically, this occurred just a few days after BHP boss Marius Kloppers officially opened the company’s largest office anywhere in the world, at Brookfield Place in Perth.
On August 22, BHP announced that its giant Olympic Dam mine in South Australia and its outer harbour development at Port Hedland had been put on ice. Together they took an estimated $50 billion of planned spending out of the economy.
The news was more dramatic two weeks later when the plunge in iron ore prices forced Fortescue Metals Group to cut 1,000 jobs and defer its Kings mine development.
Since then, a raft of other miners have cut jobs and aspiring project developers Oakajee Port & Rail, Aquila Resources, Grange Resources, and Jupiter Mines have halted or scaled back work.
That has flowed through to engineers and other mining service companies, which have seen been hit by a slump in the volume of work and also pressure to cut margins.
The new business environment was summed up by Rio’s investor seminar held in late November.
The focus was all on cost cutting and efficiency; and to show how much this new focus can achieve, Rio said it had lifted iron ore production in the Pilbara by 7 million tonnes per annum through de-bottlenecking and productivity improvement, with minimal capital spend.
The renewed focus on costs and efficiency is shared with vigour by the oil and gas sector, after Chevron this month announced a $9 billion cost blow-out (to $52 billion) at its Gorgon liquefied natural gas development on Barrow Island.
There has also been growing speculation that rising costs will make construction of the Browse project - seen as the next big LNG development - commercially unviable.
What it means for business
Despite all of these apparent negatives, Deloitte partner financial advisory services, Gary Doran, sees a positive outlook for WA business.
“The expansion projects have driven everything until recently, but there is a very strong production cycle that will take over,” Mr Doran said.
“The players that understand that will do very well.”
To illustrate this point, he said the state’s iron ore production, currently 330mtpa, is set to double over the next three years, as projects currently under way are completed.
That will lift demand for explosives, consumables, maintenance work on roads and railways, and numerous other services.
Similarly, LNG production in WA will more than double to 48mtpa when current projects are finished.
Mr Doran said this would create a very differ ent business environment.
“Whereas the boom in capex was all about securing your workers so you could get your project done on time, production is all driven on cost control,” he said.
Mr Doran said he had observed many project operators retendering and repricing work, but rewarding contractors who came back with a “reasonable and well thought-out” response.
“We were overheated, costs were escalating; the majors needed more sustainable pricing,” he said.
Mr Doran added that the reward was coming in the form of longer contract terms with a larger volume of work.
Watching costs
BDO corporate finance director Sherif Andrawes said cost cutting and flexibility were the new mantras.
“Companies that were a bit more careful are doing okay,” he said.
Mr Andrawes said this applied across all sectors.
“I’ve spoken to some companies in retail that are doing very well and there are others in mining services that are not doing well,” he said.
Mr Andrawes told WA Business News the slowdown in mining projects would help to take cost pressures out of the economy, helping businesses across all sectors.
He said some businesses needed to go further, for instance by cutting non-essential services that did not affect their customers.
Another option was to halt lateral services, and focus on their core business.
However, the reality was that some businesses were struggling, and that had led to an increase in merger and acquisition discussions.
I’ve never been as busy as I have been since September,” Mr Andrawes said.
“We’ve brought in staff from the east coast to help us cope.”
PwC managing partner WA Nick Brasington shares the optimism about the state’s longer-term outlook.
“The next six months will be tough; confidence has taken a hit and it always takes time to recover from that,” Mr Brasington said.
“But I have no doubt the future for WA remains extremely positive.”
He said the renewed focus on costs and efficiency would challenge many businesses; those that were innovative and poised to take advantage of opportunities would do well.
“The best time to create opportunities and differentiate yourself is in times of difficulty,” he said.
He believes the state’s rapid growth will require more investment in infrastructure, such as roads, shipping ports and airports, and this would create another layer of opportunity, particularly for the construction sector.
“The biggest challenge will be funding all the infrastructure that is needed,” Mr Brasington said.
